What Is Crowdfunding?
With some analysts predicting business lending through crowdfunding in the UK could exceed £1bn by the end of 2015 then you really should be aware of what crowdfunding is.
The Perfect Storm For Business Loans?
They say that stress can be the best driver of innovation. As the recession took hold and strangled business lending we started to see innovation (not that crowdfunding is new) in the sector. If you look at the level of business loans declined then you can start to the stress behind the innovation;
Between 2007 and 2010 the number of business loans declined by the big five business banks increased from 5.6% to 20.8%.
This means that demand continued but supply slowed. As we know, the UK banking sector is akin to an oil tanker, it takes a long time to turn round. As businesses started to look to grow and evolve from 2011 onwards, the supply of traditional funding remained restricted.
Add to the above that savers were not getting any return on their cash and you have both borrower and lender keen to do more. From this we saw the serious birth of crowdfunding.
How Crowdfunding Works
There is a short video if you scroll down. However, if you want the simple explanation of crowdfunding then think banking in it’s purest sense. Crowdfunding has three parties;
- The Saver (or Investor)
- The Crowdfunding Site
- The Business (or Borrower)
In really simple terms, the saver puts money in and chooses which business they want to help finance. The crowdfunder merely administers the transaction. That is really about it.
From this basic structure we expect to see business lending through crowdfunding to exceed £1bn next year.
The Types of Crowdfunding
Crowdfunding takes on 3 main types. We list 4 as ‘donation’ is a small part and relates more to social enterprises than anything else. The main types are below;
Reward Crowdfunding – This model is operated by sites such as Kickstarter. The business will borrow for a project (think new product, invention etc). In return for investing the investor will receive a reward rather than a financial return. This could be a protoype of the product, a credit within the project etc.
Peer to Peer Lending – Standard business loan. The business asks for money and says why, it provides some background and financial detail. The saver chooses where to put their money and they get paid back over a term (normally up to 5 years), the saver receives a level of interest well above normal savings rates. The business gets it’s finance at a still competitive rate.
Equity Crowdfunding – Rather than have a single angel investor, the business raises it’s total funding from lots of investors who all have a share in a holding company. The holding company have the equity stake sold by the business.
What Next For UK Crowdfunding
Let’s be straight, crowdfunding is growing. The sector now finances property, development, invoice finance, trade finance, equity, loans, pretty much everything that your bank could finance.
Our message is that you need to know that crowdfunding is a genuine and viable option for your business. Anything above that then give Lime Consultancy a call on 01293 541333 or email direct here.
By Dave Farmer
Ref: Nesta 2013 & Eurostat